What's Next for Illinois Non-Profit Hospitals and Their Tax-Exempt Statuses?

In August, the Illinois Department of Revenue denied the property tax-exempt status of three Illinois non-profit hospitals: Northwestern Memorial's Prentice Women's Hospital in Chicago, Edward Hospital in Naperville and Decatur (Ill.) Memorial Hospital. The IDR's denials were made because it deemed the three hospitals did not provide a sufficient amount of charity care for the poor and indigent populations to warrant an exemption on their property taxes. In 2007, Northwestern Memorial and Edward Hospital showed charity care as 1.85 percent and 1.04 percent, respectively, of their net patient revenues, while Decatur Memorial reported charity care as 0.96 percent of its net patient revenues.

In September, the IDR planned to reexamine 15 additional non-profit health systems' tax-exempt statuses, but Illinois Gov. Pat Quinn has since halted the state's investigations until the state legislature makes recommendations on how charity care will be defined. Illinois does not currently have a set percentage or formula on what is an acceptable amount of charity care a non-profit hospital should provide, and the state legislature plans to release recommendations on this in March 2012.

According to John Dunn, JD, partner with McGuireWoods and senior vice president in the state government relations group of McGuireWoods Consulting, the IDR's crackdown on Illinois non-profit hospital tax-exempt statuses came on the heels of an Illinois Supreme Court ruling from last year. In 2010, the Illinois Supreme Court ruled that Provena Covenant Medical Center in Urbana, Ill., could not qualify for property tax-exempt status because it did not provide enough charity care to its community, although Provena argued that it provided millions of dollars in other free care and community benefits.

The microscope on Illinois non-profit hospitals does not end there. Chicago Mayor Rahm Emanuel also recently proposed cutting free water and sewage services for city non-profits in October, and Moody's Investors Service recently released a report that said the revocation of Illinois hospitals' property tax-exempt statuses could be debilitating to the sector's finances. "This has implications beyond property taxes," Mr. Dunn says. "A not-for-profit status is, by virtue, about the level of charity work they do, and this could jeopardize their 501(c)(3) statuses."

Illinois non-profit hospitals will now have to take their cases to the state capital, Springfield, as the legislative session will start in January. Hospitals have argued that money-losing service lines such as emergency care, Medicaid populations, and other community benefits should be taken into account for the "formula" of charity care. Mr. Dunn says the Illinois Hospital Association will be active in those fights, but he says if hospitals really want to salvage their property tax-exempt statuses, they will also have to get involved in the legislation process. "Some hospitals have gotten engaged, and more probably should because once it goes through legislation, it's a lot harder to change on the backend," Mr. Dunn says.

The inherent problem, however, is that community benefits differ from hospital to hospital, making it difficult for a charity care formula to cover the varying aspects of indigent care. "Each hospital is different, each mix of patients is different, and it's tough for the hospital association to come up with standards that work for everyone," Mr. Dunn says.

With last year's Illinois Supreme Court ruling in mind, Mr. Dunn expects the legislation to be more critical of non-profit hospitals' property tax-exempt statuses and could lead to bigger concessions down the road. "I think that if hospitals do not get engaged, based on the precedent set last year, the legislation will be unfriendly to hospitals, and you will see lots of property tax exemptions denied," Mr. Dunn says. "The next step will be to deny sales and use tax. Ultimately, hospitals could have their IRS status jeopardized, and this same type of analysis of not-for-profits could be done on a federal level."